Pibs: Too good to be true?

Informed Choice chartered financial planner Martin Bamford was featured in the FT today, commenting in an article looking at the features of permanent interest-bearing shares (Pibs).

Pibs are a class of shares issued by building societies which offer a fixed rate of interest to investors.

Whilst they cannot be sold back to the issuing building society, it is possible to buy and sell Pibs on the stock exchange. As a result, the value of Pibs varies depending on investor demand.

Pibs used to be considered reasonably safe investments until quite recently.

It seems that the global financial crisis and general weakness of the banking sector has had a big impact on the relative safety of Pibs as an investment.

In the past month we have seen Bank of Ireland offer to repay investors only 20% of the face value of their Pibs. Bristol & West offered investors a repayment of only 13.7%, as a result of their restructuring plans to deal with debt problems.

Within the FT article, Martin commented:

“Aside from the uncertainty of the call option, if the firm issuing the Pibs goes under you are unlikely to get back your investment,” says Martin Bamford, at Informed Choice.

“This is because Pibs holders rank behind all other lenders, depositors and building society members holding share accounts.”

With many Pibs offering a gross yield between 6 and 8 per cent, it is understandable that investors in this low interest rate environment would be tempted by these rates.

Higher yields are there to reward investors for exposing their money to additional risks.

When an investment is offering a yield of 8 per cent (or higher) an investor should always question the risks they are taking to achieve this return, regardless of how ‘safe’ the investment has been historically.

Photo credit: Flickr/Göran (Kartläsarn)